A revised home office tax deduction is giving remote workers some much-needed relief, after COVID-19 led to major changes in the workplace during 2020.
About one-third of Canadian adults shifted to remote work at some point last year.
Many believe that the trend will continue to transform the workplace long after the pandemic.
With so many Canadians working from home, the Canada Revenue Agency (CRA) has made important changes to the home office tax deduction, making it available to many more workers than before.
Why the change?
Working from home has its costs. You may have had to upgrade your internet package, or noticed that your electricity bills have gone up because you’re at home using technology all day.
An office is also space that you have to carve out in your home, whether you’re using a spare room, a basement or taking over the kitchen table. Many Canadians even moved to find a place that offered more space to accommodate their new working situation.
The improved home office tax deduction can help offset some of those additional home office expenses by reducing your tax bill.
Who is eligible for the home office tax deduction?
In previous years, only self-employed Canadians have been able to take advantage of the home office tax deduction.
However, as the government of Canada seeks to provide financial help during COVID-19, a number of new tax breaks have been made available when you file your 2020 taxes.
Due to the overwhelming number of Canadians who worked from home last year, the CRA has expanded eligibility for the home office tax deduction to include those who work for an employer.
2 methods for claiming home office expenses
The CRA offers two options if you want to claim home office expenses on your 2020 taxes and you work for an employer. Let’s take a look at them in more detail below:
1. Temporary flat rate method
In order to make the home office tax deduction simpler for more Canadians, the CRA is temporarily offering a simplified way to claim home office expenses. With the flat rate method, you can claim $2 for each day that you worked from home, up to $400 per individual.
When you use this method, you do not need to keep support documents to prove your expenses, and your employer does not need to provide a T2200 Form.
You may claim days that you worked either full- or part-time, but not vacation days or days off.
To be eligible to claim the temporary flat rate, you need to have worked from home due to COVID-19 more than 50% of the time for at least four consecutive weeks in 2020 without being reimbursed for extra expenses by your employer.
Even if this was your choice, you are still eligible.
2. Detailed method
If you are an employee who worked from home during the COVID-19 pandemic or an employee who was required to work from home, you can claim your actual home office expenses using the detailed method.
You will need to keep receipts in case you are audited. You also need a T2200 Form completed and signed by your employer.
The list of expenses that can be claimed includes:
- Utilities or the utilities portion of condominium fees
- Home internet
- Maintenance and minor repairs
- Some phone expenses
- Office supplies (like stationery, ink cartridges, etc.)
Using the detailed method, you will need to fill out Form T777S Statement of Employment Expenses for Working at Home Due to COVID-19. This is where you can list the above expenses.
You’re eligible if you were required to pay for expenses related to your workspace because you:
- Were required to work from home or
- Chose to work from home during 2020 as a result of the pandemic
You must also have used your workspace more than 50% of the time for at least four consecutive weeks, or only used your workspace to earn employment income.
What can you do if you’re in debt to the CRA?
While the home office tax deduction will help reduce your final bill to the CRA, self-employed Canadians can find themselves in tax debt more easily than others, especially when they first get started. They may not know when to start charging harmonized state tax (HST) or that they should set aside income taxes and Canada Pension Plan contributions.
Consider filing for a consumer proposal
There are options when you can’t afford to repay your debt, such as a consumer proposal. One of the advantages of a consumer proposal is that you get debt relief without having to liquidate any of your assets, something you might have to do in bankruptcy.
When you file a consumer proposal, you offer your unsecured creditors a fixed monthly payment for up to five years. In return, you only have to repay a portion of your total debt, and you don’t have to pay interest on the remainder.
In general, the CRA is willing to consider consumer proposals and tends to accept proposals that would allow them to recover more than if you filed for bankruptcy.
Home office tax deductions for self-employed Canadians
Self-employed Canadians have always been able to claim work from home expenses. If you’re new to self-employment, you will have to use the Calculation of Business-Use-of-Home Expenses section of Form T2125 to claim the home office tax deduction.
Newly self-employed Canadians, worried about owing the CRA money, should look carefully at all their options for claiming business expenses to reduce their tax bill.
You can only claim home office expenses if your home is your primary place of business. If you also have an office to earn income or meet with clients, customers, or patients, you cannot claim work from home expenses.
How to calculate your workspace expenses
Those who are eligible can claim a percentage of their home expenses against their gross revenue. Start by calculating the space devoted to work as a percentage of your total home.
If you have a 10’ by 10’ office out of a total of 1,000 square feet in your home, 10% of your expenses would be your deductible business use portion. Those expenses include:
- Mortgage interest
- Property taxes (or rent)
- Your phone bill
If your work and personal space overlap, you would calculate what percentage of time you use it for your business. For example, if you use your living room eight hours a day, five days a week, you would divide 40 hours by 168 hours (the total amount of hours in a week), then multiply that figure by your deductible business use portion.
Reduce your taxes by claiming your home office expenses
If you worked remotely in 2020, there is a good chance that you can claim work from home expenses when you file your taxes.
Self-employed Canadians have always been able to claim home office expenses, and now Canadians who work for an employer can use either the simplified or detailed method to recoup some of the added costs that have come with remote work.
Find out what expenses you can claim, what forms you need to complete, and how you can reduce your tax bill.